How Construction Loans Work

Construction loan is suitable for constructing new commercial and residential property. In case of insufficient fund to finance the construction, an individual or company can apply for construction loan.

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Thus, it is important to know how construction loans work.

If you want to build your new home yet do not have enough fund to finance on it the best thing to do is to apply for construction loan. However, you should anticipate that it is difficult to qualify in a construction loan as compared to any traditional loan. This is because the bank does not require any collateral instead a construction loan involves higher interest rates. On the other hand, before the bank would grant your loan request they will first conduct appraisal of the value of the property you are planning to construct. This procedure is a trickier because the appraiser will base the value by guessing the final output of the property. The processing of the application would take time because there is a necessity to make a budget of the amount needed in completing the construction. Likewise, the bank will hire an inspector to check that the construction is done according to the drawn up list.

Residential Construction Loans

Residential construction loans are short term loan scheme in which the builder is required to pay the interest only as the construction progresses. The interest differs according to the prime lending rate. In like manner, the amount granted by the bank or other financing firms is determined by the credit score of the borrower. In case that the borrower has good credit rating, approval for high credit limit is possible. In addition, before you decide to apply for residential construction loan you should first understand the sanctions of this loan scheme. Also, the borrower can pay the loan in four installments. In every installment the borrower is required to submit any document that will prove the progress of the construction.

Commercial Construction Loans

As the name implies, a commercial construction loans is ideal if you are planning to construct apartments, industrial buildings, warehouses or retail centers. Likewise, the lending firms are utilizing ratios in sanctioning the loan. The lender uses the Loan to Appraised Value Ratio in order to ensure that the investment is profitable. When te ratio is lower it implies that the appraised value is higher. On the other hand, when the property is appraised during the construction period, the lender would use Loan to Cost ratio.

There are lots of lending companies and banks that are willing to offer commercial and residential loans. All you have to do is to choose the loan scheme that is suitable to your financial needs. You should also understand the terms and conditions before signing the contract of the construction loans. As much as possible the borrower should compare the terms and rates of the construction loan.